If estate taxes are a concern and you’re looking for a way to benefit charity while transferring assets to loved ones, consider a charitable lead trust (CLT). But you may want to act soon: CLTs save the most tax when interest rates are low, like they are now, and rates are expected to begin rising – perhaps as soon as this summer.
How a Charitable Lead Trust works
- For a given term, the CLT pays an amount to one or more charities.
- At the term’s end, the CLT’s remaining assets pass to one or more loved ones you name as remainder beneficiaries.
- When you fund the CLT, you make a taxable gift equal to the present value of the amount that will go to the remainder beneficiaries.
- The property is removed from your estate.
How a CLT saves tax
For gift tax purposes, the remainder interest is determined assuming that the trust assets will grow at the Section 7520 interest rate. The lower the Sec. 7520 rate, the smaller the remainder interest and the lower the possible gift tax — or the less of your $5.45 million lifetime gift tax exemption you’ll have to use up.
If the trust’s earnings outperform the Sec. 7520 rate, the excess earnings will be transferred to the remainder beneficiaries gift- and estate-tax-free! Because the Sec. 7520 rate currently is low, now may be a good time to take the chance that your actual return will outperform it.
If the CLT is set up as a grantor trust, you can also get an income tax deduction for the value of the charity’s interest in the trust. However, there are some downsides. For example, you’ll have to pay taxes on the CLT’s income.
More to think about
These are just some of the ins and outs of CLTs. Contact your tax advisor for the rest of the details or to learn about other ways to both support your favorite charities and provide for your family — all while saving taxes, too.
